Much of Australia's top stocks are overpriced at current levels and although they pay handsome dividends, some could a trap waiting to catch out income-seeking investors. However the banks, two big retailers and financials are great businesses that have been built up over many years and for that reason deserve a spot on watchlists – here are my four favourites.
ANZ (ASX: ANZ) is Australia's third biggest bank but could well be the biggest in two decades thanks to a strong ambition to be a contender in Asia's financial markets. ANZ's point of difference from Australia's other big banks is that it is seeking to compete with foreign banks in the region — something that requires visionary leadership and careful planning for thinner margins. However it is on track to generate 25-30% of group revenues from Asia by 2017.
A banking stock that slightly disappointed shareholders this year with a lower than expected annual profit was Suncorp (ASX: SUN). However the company paid a great dividend (most likely not to be repeated next year) and is now free of its 'bad bank' debt that loomed over the retail banking and insurance giant since the GFC.
Wealth management and creation is becoming vitally important for both young and old, with more and more people putting money into superannuation accounts for tax concessions and long-term benefits. Not many people understand the financial system or how it works – enter AMP (ASX: AMP). AMP's share price has suffered this past year due to a profit downgrade but its presence in financial planning, wealth management, superannuation, insurance and investments means it cannot be overlooked for long.
A company that is similar to AMP and potentially the most convincing 'buy' at current prices is Challenger (ASX: CGF). Challenger provides financial security for retirees and has a big funds management business. Like AMP (and most other fund managers), profits will grow when the stock market has a bullish rally. With the market's trend likely to continue into the next year, it could be the perfect time to start searching for good companies at even better prices. Trading on a P/E of 8.8, this Fool thinks Challenger is undervalued.
Foolish takeaway
The best time to buy stocks is right now. There are heaps of huge dividend paying companies still available on the market. With interest rates so low and property out of many investors' reach, now could be the time to set yourself up for financial freedom with some great long-term stocks.
ANZ, AMP, Suncorp and Challenger are worthy of a spot on your watchlist, but none of them represent our favourite stock for income investors right now. Discover The Motley Fool's #1 income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
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Motley Fool contributor Owen Raszkiewicz owns shares in Challenger.
